CRS: Capital Gains And Dividends Drive Income Inequality

January 04, 2012 4:01 pm ET —
Walid Zafar

Last year, the Washington Post published this insightful
piece examining how capital gains tax rates were accelerating the gap
between the rich and poor. Lobbying by the very wealthy, coupled with the fact
that many members
of Congress are themselves millionaires, has led to a situation where the
Warren Buffett's of the world pay a lower effective tax rate than
their administrative staff.

Now, a new report by the nonpartisan
Congressional Research Service (CRS) sheds more light on widening income inequality
in America, a trend that at least one GOP presidential hopeful, former
Pennsylvania senator Rick Santorum, has said he supports.
(The GOP contenders have promised to cut taxes even
further if they're elected.)

CRS' Thomas Hungerford looked at three potential causes
of inequality — wages and salaries, capital income, and changing tax rates —
and concluded that the income earned through capital gains, dividends, and
business income has had the most to do with the increasing gap between the country's
haves and have nots.

Between 1996 and 2006, the last year for which
tax data is available, the inflation-adjusted income of the poorest 20 percent
of taxpayers decreased. During the same period, the income of the very rich,
the top 0.1 percent, nearly doubled.

This occurred, the report concludes, because wealthier
earners started benefiting less from wages and salaries and more from investments. In 2006, the top 0.1 percent of earners
derived 51.9 percent of their income from just dividends and capital gains. In
contrast, just 0.7 percent of the income of the bottom 80 percent came from
dividends and capital gains. During the decade, the poorest Americans saw their
capital gains as a percentage of income decrease while those in the top
quintile saw a sizable increase.

But
it wasn't just that the poor didn't benefit from capital gains as much as the
rich; they're actually poorer
than they were before. Here's a chart from CNNMoney:

The Republican candidates for president want
to keep the current capital gains tax system in place, with some promising
to eliminate capital gains taxes altogether. While conservatives complain that
having a more progressive income tax code "soaks the rich," the trend is that
the rich are earning a greater percentage of their income in capital gains and
dividends. Since, as the report notes, "about half
of the total income of the top 0.1 percent comes from capital gains and
dividends" and the disparity will likely increase
in the coming years, income inequality will not only grow, but it will do so at a much more rapid pace — especially if conservatives are
successful in reducing rates even further.